Wild cotton market ride may be repeated for 2011-2012 crop

On paper it looks like the fundamentals of a more normal supply and demand are kicking in. However, the days of a simple cotton market are gone for now.
The return of volatility to a once staid cotton market is “based on unknowns more than anything else."
Marketer believes U.S. cotton acreage will reach 13.3 million acres, but extraordinary pre-planting prices could change people’s minds and more cotton could be seeded.

The last thing a bull rider wants after getting turned inside out by a volatile bovine is to get right back on the same large farm animal.

However, American cotton growers may have to wrap their rope around another explosive cotton season with this season’s crop just like the last, even though “on paper” it looks like the fundamentals of more normal supply and demand are kicking in, according to Anthony Tancredi, president of Allenberg Cotton Co., the world’s largest cotton merchant based in Cordova, Tenn.

However, Tancredi also said any market prediction he would make on the eve of the U.S. cotton planting season would likely not hold up after going through the 2010-2011 marketing season he called crazy, ridiculous and unpredictable.

Tancredi mixed plenty of needed humor along with his insights into the whacky world of cotton pricing to the Cotton Board at its spring meeting recently in Del Mar, Calif.

The days of a simple cotton market are gone for now, he said.

The return of volatility to a once staid cotton market is “based on unknowns more than anything else. There is not one person in our company who can tell you what tomorrow’s price will be, and we have spent our whole lives working 12 to 14 hours days” in the business, he said.

“It is out of control volatility really run by fear,” he said.

Demand for cotton fueled by renewed, unexpected consumer demand, as well as production problems in various parts of the world have drawn down stocks to record low levels that in turn led to the highest prices in history.

“People are coming to me saying, ‘I do not care what the price of cotton is, give me some.’ It is panic in the marketplace,” like he has never seen in 26 years in the cotton merchandizing business.

Prices are still in “no man’s land,” he said. The day Tancredi spoke the upland price was at $1.30 per pound, with the question being how high will it go. It cannot go up unfettered without consequences, he emphasized.

Could price destroy demand?

It is currently high enough to attract land for cotton worldwide, but he warned there is a danger that it could reach a point where it would destroy demand. He thinks that point is above $1.80 per pound.

Mills are already looking at 60-40 blends instead of 100 percent cotton due to higher natural fiber prices, although the high price of oil is sending synthetic fiber prices higher.

If it passes that $1.80 level, Tancredi said textile and apparel companies could simply stop making cotton products.

Going into the 2011-2012 season, Tancredi did not surprise anyone when he said the world will respond to record cotton prices by planting much more of it.

China, the largest producer and consumer of cotton, remains the unknown. The Chinese government dictates what farmers produce and that may not be cotton in the most populous nation in the world. However, cotton is the most profitable crop to grow there, and he expects growers will find a place to plant it — “under a tree or in a ditch” — regardless of what their government tells them to do.

In India, the only crop more profitable is sugar cane. “Cotton is going crazy there. People are calling us to see if we want to invest in cotton farming operations in India.”

Cotton is once again a strong competitor for land against other, equally profitable crops in the U.S. It is No. 1 on the list of money markers for the Southeast. It is running neck-and-neck with corn in the Delta “for the first time in a long time.”

Texas is unquestionably cotton. Acreage will be huge there, and if it rains, so will the crop.

He believes U.S. cotton acreage will reach 13.3 million acres, but extraordinary pre-planting prices could change people’s minds and more cotton could be seeded.

Tancredi predicts a 21-million bale U.S. crop to be added to a 1.9-million carryover would give a total supply of 22.9 million bales. Holding back 2 million bales to stay above the “panic” point and selling 3.7 million bales to domestic mills would leave about 17 million bales for export.

Does the world need 17 million bales?

“Does the world need and want 17 million bales?” he questioned in his paper prognostication based on a predicted worldwide cotton acreage explosion.

That is a fundamental, paper look at the situation. Muddling it is a never before seen $1.30 per pound pre-planting price to growers.

All of this, he said, is creating a new marketing paradigm. What once was a relatively straightforward, trouble free cotton marketing system has become so risky that it is creating a “cloak and dagger” atmosphere. He said because of the risks inherent to the wildly fluctuating market, Allenberg has become selective with whom it does business.

That is exemplified by a contracted cotton grower recently failing to deliver cotton to Allenberg that could eventually cost the cotton merchant $12 million, if a settlement is not negotiated.

Tancredi used the example to tell growers that they should be careful with whom they do business. Counterparty risk management has become No. 1 on a grower’s risk management chart of importance, ahead of margin and market risks.

When the market takes basis swings of 2000 on and 5000 off, risk management takes on a new look, he said. Capital becomes difficult to generate in those market swings. He said a market that swings 40 cents in a week could force people to bail out of deals.

“Predictability is out of the market,” Tancredi said, making it far more risky for everyone.

He recommended growers lock in a profitable price with a marketer they have thoroughly investigated before planting and “watch and wait” to see what happens in the world. A monsoon or other natural disaster in the world could revive the crazy 2010-2011 market for this new crop. Consumer spending that saw the run up in cotton prices may falter in the wake of rapidly rising energy costs.

There is simply too much uncertainty in the world, citing unrest in the Middle East and escalating oil prices. If filling a car cost $80, consumers will think twice about buying apparel or other goods.

He also does not believe the U.S. economy is turning around just because someone says it is, citing ongoing high unemployment, a continued weak housing market and the price of fuel.

Trancedi said Allenberg has had more producer groups and textile mills come to its offices for advice in the past six months than he has seen in the previous 10 years.

“All want to know how they cannot be exposed in this market. They want to learn how not to make dumb decisions and to know how we are not making dumb decisions … all logical questions,” he said.

“Volatility is not going away. We cannot get comfortable yet.” But Tancredi added, “We have to plant the cotton.”

Fundamentals of supply and demand will return to the market. The question is when.